Miller and Modigliani's irrelevance proposition(redirected from Modigliani Miller Theory)
Miller and Modigliani's irrelevance proposition
Theory that if financial markets are perfect, corporate financial policy (including hedging policy) is irrelevant.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
Miller and Modigliani's Irrelevance Proposition
A theory stating that if financial markets are perfectly efficient, then how a company is a financed has no bearing on its performance. That is, without taxes, asymmetric information, or government and other unnecessary fees, then a company is equally likely to perform well regardless if it is financed by equity issues, debt, or something else. It also states that a company's dividend policy is irrelevant in these circumstances. This theory has been used to justify the increased use of leverage since the 1980s and critics contend that it has led to needless risk-taking.
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